It is no surprise that S Corporations are the preferred business structure for small business owners. For an S-Corp with one employee (usually the owner), a solo 401(k) is usually the best retirement starting point. That’s why our calculator comes in handy.
When the owner is looking for larger contributions, he or she can step up to a cash balance plan or defined benefit plan. But we can discuss that later.
The goal of this post is to show you how to calculate your maximum solo 401(k) contribution with an S-Corp and offer a few tips along the way. Let’s get started!
Table of contents
Understanding solo 401(k) contribution limits for S-Corp
Understanding the 401(k) contribution limits is not that tough. There are only two components of the plan. You just have to understand how these components work together to allow you the contribution you are looking for (subject to the annual cap). Here are the two:
- Employee deferral (made by the employee)
- Profit sharing (made by the employer)
The IRS defines the maximum employee deferral annually and then establishes the maximum overall contribution that can be made to the plan. There really is not a defined maximum for the profit sharing component as long you don’t go over the annual cap.
What is an employee deferral?
Many people get confused as to what the employee deferral actually is and how it works. So let’s break it down.
It is sometimes called an “elective deferral.” But the important part to note is that whether it is made or not is the choice of the employee. The employer does not determine this deferral. Of course, with a solo 401(k) the company and employee is really one of the same.
With an employee deferral, the company actually pays the employee a wage and the employee then “elects” to defer the taxes on this portion of the wage and have it contributed into a retirement account. This amount will grow tax deferred, but the employee will pay federal and state income taxes when the funds are distributed at retirement.
But it is important to note that the employee will still pay employment taxes (social security and medicare tax) on the employee deferral. This is because it was a wage, which is subject to employment taxes even though the federal and state tax is deferred.
What is profit sharing?
So now that you understand a little about employee deferrals, let’s take a look at what the profit sharing component is.
The phrase “profit sharing” is a little confusing. The company is not really sharing a portion of the company’s profits with it’s employees. So the profit and loss of the business does not come into play in the calculation.
The calculation is actually based on W2 compensation. The company merely states that for all eligible employees (presumably just the owner and possibly spouse) they are going to give an amount from zero to 25%. This is of course subject to the maximums.
Use EMPARION PLANS on
Solo 401(k) Maximums
The table below shows the contribution amounts and maximums. But remember these are the solo 401(k) cap. You can contribute less than the amounts below, but only up to your W2 for the deferral.
| 401(k) Contribution Limit for 2025 | Amount |
|---|---|
| Deferral for under age 50 | $23,500 |
| Deferral for age 50+ | $31,000 |
| Maximum for under age 50 | $70,000 |
| Maximum for age 50+ | $77,500 |
Normally the IRS will increase the deferral $500 every year or every other year. The total allowed contribution usually goes up $1,000 based on inflation. It is important to note that the above numbers include the catch-up for people age 50 and over.
How much can an S Corp contribute to 401(k)?
For solo 401K contributions, the compensation of the owner of the business can be defined as the medicare wages, which is reported on their W-2. It is important to note that compensation can differ slightly from one plan document to another, so please ensure that you fully understand the definition of compensation.
After the compensation for the incorporated business owner has been determined, the maximum Solo 401K contribution is determined by completing the next steps:
- Enter Code D in Box 12 a
- In Box 13 check Retirement Plan
In the W-2 Instructions Box 1 of the W-2 is NOT to include any pre-tax elective deferrals. In addition, if the elective deferrals are for a Roth solo 401K, Code AA must be used in Box 12 a (Form W-2).
For self-employment income earned through the S-Corporation, the EMPLOYEE can contribute as follows:
- The lesser of the maximum employee deferral noted above, or
- The total entered in Box 1 of the W-2 (S-Corporation), PLUS
- Pre-tax employee contributions that are not entered in Box 1
If you have a “regular” job and you contribute to its 401K plan, any contributions to the Solo 401(k) plus be reduced by that amount.
Is a Cash Balance or Defined Benefit Plan Right For You?
For self-employment income earned through the S-Corporation, the EMPLOYER can contribute as follows:
- Up to 25 percent of the total in Box 5 of the W-2 (S-Corporation), PLUS
- Pre-tax employee contributions that are not entered in Box 1 (important note below)
How do I max out my solo 401(k)?
So now that we have defined the maximum amounts that you can contribute, you need to make sure that your W2 is in line. By looking at the table above, you will see that the contribution will max out in 2020 at $150,000.
As such, you will notice that there is no difference in contribution levels with the $150,000 example and the $200,000 example. But you are required to pay yourself a reasonable wage.
You and your accountant may determine that your reasonable wage should be $250,000. That is fine, but a wage that high will not allow you get more money into the solo 401k. Your max is already met.
How are Solo 401(k) contributions calculated?
If the following applies:
- You are under 50;
- You do not make contributions to another plan, i.e., a 401K plan via a full-time employer;
- The S-Corporation provides you with a W-2;
- Box 1 has $32,000
- $19,000 Pre-tax employee contributions NOT in Box 1, you can do the following:
If you have an S Corporation, all contributions MUST be based on your W-2 and not be based on the business profits or the pass-through income.
Options for Larger Contributions
But what if you want to get more than the above amounts into retirement? What options do you have?
Well many of our client choose a cash balance plan. This is a type of defined benefit plan. Rather than being limited to $57,000, cash balance plans allow contributions up to approx $300,000 (depending on age and income). They also can be used with a solo 401k plan to really super charge your retirement contributions.
Cash balance plans have been gaining in popularity. The benefits are pretty clear. But before you set up a plan, make sure that you understand the pros and cons of cash balance plans.
Under a cash balance plan, an employer credits a given participant’s account with a specific percentage of his or her annual compensation plus an interest component. Contributions to cash balance plans are based on what is required to provide determinable retirement benefits to plan participants. Actuarial assumptions and calculations are required to determine the correct contribution levels.
If you are looking to get a bit more into retirement, then combining a solo 401(k) with a cash balance plan or other defined benefit plan may be a great option. But be careful. There are some limitations and restrictions when combining plans, so make sure you hire a third-party administrator for your plan.
Solo 401(k) Calculator For S Corp
- Pay yourself a reasonable wage on a W2. S-Corp owners are required to pay a reasonable wage that is subject to employment tax. Make sure you and your accountant agree on the wage first.
- Make your employee deferral via payroll deductions. Remember that the deferral is elective and is the lower of compensation or the deferral limit.
- Consider how much profit sharing you want to contribute. Remember that profit sharing is elective as well. You can take your gross compensation at 25%. But your combined contributions can’t exceed the above limits.
- Decide who will be the custodian of your funds. Many accounts are opened at the large players like Vanguard, Fidelity, and Schwab. But you may be able to self-direct the funds and be your own custodian.
- Fund your account before the deadline. Don’t forget to contribute the profit sharing contributions up to the date you file your taxes including extensions.
